equity meltdown

The better gold price, coupled with the big downturn in general equities, has meant that over the year to date gold has outperformed stocks quite significantly even in the USA – and even more so in most other countries.

As the year draws to a close we see that gold has outperformed equities, virtually everywhere in the world. Year to date U.S. equities, as measured by the Dow, S&P and NASDAQ, are down over 10%, while European and Asian equities have fallen by even greater percentages. Gold, in U.S. Dollars is also down year to date, but only by a little under 4%. Indeed the gap may even be widening as the year end approaches with gold gaining and equities still falling.

So even in the U.S. gold has comfortably outperformed equities over the year, while in other key currencies it has even done rather better having seen gains in most, with many currencies declining in value against the mighty dollar. Globally, thus gold has more than performed its role as a safe haven investment extremely well. In countries where the domestic currency has collapsed, like Venezuela and, to an extent, Argentina, gold has proved to be an exceptionally good asset to hold.

As an example of gold in major currencies, the gold price in Euros is up by 1% so far this year and in the British pound sterling it is up around 2.5%. while in both the EU and the UK equities have fallen sharply (around 11%) over the year to date. In the Australian dollar gold is up almost 6%, and in Canada it is up around 3.5% in the domestic currency’ while again equities are down sharply in both countries.

There are exceptions of course – in Japanese yen gold is down by 5.7%, but Japan’s prime stock index – the Nikkei – is off by 11.4% so gold has still easily outperformed the market there too. In Swiss Francs, another currency which is usually considered among the stronger palyers, gold is also down – by around 2.9% – but again it has comfortably outperformed the Swiss Stock market which is also down a little over 11%! (All figures as at close Friday December 21st).

If one looks also at another key investment asset – the heavily promoted bitcoin – the biggest bitcoin player, BTC, has lost around a massive 70% since January 1st this year. I think that more than quashes any argument that bitcoin provides a better haven than gold which was prevalent when BTC was riding high in the second half of 2017. It has proved to be a far more volatile asset than gold which somewhat defeats the safe haven principle! It is altogether a much more speculative asset class and we would not be surprised to see the price dive further in the weeks and months ahead. Other cryptocurrencies have declined even further than BTC in percentage terms.

As we have noted before we have not been a believer in bitcoin as an investment. We warned people to get out when BTC was at around $10,000 on the way up to almost double that level so we were a little early with our advice, but were obviously correct in principle. In our view it’s better be out too soon in what was looking increasingly like a developing bubble situation than too late!

So what happens from here? Equities are still looking vulnerable while portents for gold and the other precious metals are looking positive although data may yet change the position of either or both. Geopolitics are ever increasingly uncertain – in part due to President Trump’s domestic difficulties and his insistence on a continuing trade dispute with China which seems to be disadvantageous to both nations. There are also continuing issues in the Middle East, Ukraine, Afghanistan, North Korea and the South China Sea to name but five potential flashpoints – but there could well be others which crop up in the year, or years, ahead. The Democratic party majority in the U.S. House of Representatives which will be in place in 2019 and the subsequent possibility of moves to impeach the U.S. President add further degrees of uncertainty to the mix, which could weigh on equities and the dollar and boost precious metals.

Some observers feel that silver, which has underperformed in the past year, might be the precious metal to plump for given that it tends to outperform gold when the latter is in a rising pattern. Palladium fundamentals look strong too, but the price could suffer if there is an economic recession, as could that of silver, and a global recession may, or may not, be on the cards. A U.S. recession has looked unlikely in the near term, but further falls in equities could lead to negative overall sentiment which could push the recession button and adversely affect all industrial metals – sooner rather than later.

The U.S. Federal Reserve is currently looking as if it will reduce the projected number of interest rate rises next year. If this is indeed confirmed – or if the Fed looks as if it will reduce the number of rate rises further, which looks possible if equities continue on their downwards path – then this could depress the U.S. dollar and gold could move up strongly.

A word of caution for precious metals investors though – should equities truly crash, which has to be a possibility, liquidity issues could also lead to a precious metals sell-off too as happened in 2008 as big investors struggled to stay afloat and needed to sell good assets to do so. However, if history repeats itself in this respect the twin consolations are that firstly some of the big institutions are much lighter on gold holdings this time around, given that gold investment fell out of favour given the seeming ever-upwards path of equities up until the past few weeks. And secondly comfort could be gained in that back in 2008/9 gold was the quickest major asset class to recover – indeed was rising strongly while equities were still on the way down!